Bond Rates Plunge – But Where’s the Crisis?

AMA1-16-15Ever since the financial collapse and recession of a few years ago, financial experts have been watching the sky or signs of falling. They’ve scrutinized the behavior o US assets at home and on the world stage for sings of another collapse and recession. Currently topping the list of assets to worry about: the plunging yield rates of US Treasury bonds and other assets in world trading.

According to a recent article from Business Insider, the rate of G3 government bond yields in the global marketplace has averaged lower than 1%. That’s a historic plunge, not seen even in the 1930s, when the Great Depression paralyzed the US.

The G3 is a currency group consisting of the US dollar, the euro and the yen. Its one of a number of designations describing currencies with similar characteristics, such as clout in global trading or political significance. It’s a variation on the more familiar G7, a group of 7 countries associated in terms of their outlook and behavior in international money markets.

The drop in 10-year yield rates affects all three of those currencies, not just the US dollar. As reported by Business Insider, in early 2015, the US yield of 1.959% was trumped by the yen’s drop to 0.288. In the Eurozone, the German yield hit 0.443.

Those kinds of rates are raising concerns about another widespread financial crisis. In the past, plunging rates have signaled a lack of confidence in the markets – the “panic phase” before the crash, as in the run-up to the Great Depression, when currency rates and values fell and so did devastated bankers.

But, say global financial experts, that’s not the case right now. The US economy is by many indicators on the road back from its downturn of 2008. The housing collapse that came about from years of reckless lending to unqualified borrowers led to the discovery of widespread bank malfeasance and forced a cleanup of lending standards.

The Federal Reserve stepped in to prop up the struggling economy with a string of stimulus plans, collectively called Quantitative Easing, which pushed lending interest rates historically low. The last version the Fed’s plan, known as QE3, is now winding down – and that’s fueling worries that the US economy might retreat again, hamstrung by rising rates ad a decline in borrowing.

Similar scenarios are plaguing other countries with major stakes in the global financial market, too. In the Eurozone, Greece continues to struggle with its own major debt default. And turmoil continues in countries on the fringes of that zone, including Russia and Ukraine, that are facing their own difficulties with devalued currencies and the specter of deflation o inflation.

Still those very scenarios are keeping the dollar robust. It’s the currency of choice for worried savers in countries like Russia and Argentina, and it continues to trade solidly against the euro and other leading monies.

If that’s true, then what’s behind the plunge in asset prices – and what do the mean for the future? Should investors worry that another panic is just around the corner?

Not necessarily, say advisers for the G10, a group made up of the G7 (the US, Germany, Japan, France, the UK<, Canada and Italy), plus Belgium, Netherlands and Sweden.

While those 10-year averaged yields are in fact at historically low levels and apparently inclined to hover there for the foreseeable future, those low rates in themselves don’t constitutive a run up to a serious global economic downturn.

The global economy can be fragile, vulnerable to sudden shifts and crises with both local and worldwide reach. But it’s also stubbornly though, riding out natural disasters, economic collapse ad political turmoil to remain on a largely even keel.

In the G3, for example, the Eurozone’s struggles are countered by the relatively strong performance of the dollar, which is in some ways driven by the money worries of Russia and others.

Though today’s low bond yield rates are unprecedented, they’re only one indicator of the world’s financial health. And, say market watchers, they may be a symptom of a panic that’s unlikely to materialize – a vote of no confidence that things will make a dramatize improvement.

The drop in bond yield rates offers a glimpse into the complex workings of the global money markets – but for worried investors, the sky may not be falling just yet. (Top image:Flickr/rutio)

Ro, Bam, “It’s Like We’re In the Panbic Phase of a Financial Crisis.” Busines Insider. 6 Jan 2015

Read more from The American Monetary Association:

Interest Rates: Trends for 2015?

The Bitcoin Bounces Back

The American Monetary Association Team


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